Crypto bourses block fishy coin withdrawals (2024)

Mumbai: Cryptocurrency exchanges in India are blocking withdrawal of coins at the slightest hint of suspicion over the nature of transactions.

Withdrawal and transfer of cryptocurrencies from wallet of an exchange to a private purse can be an easy route to launder money or perpetrate fraud on investors lured by ponzi schemes in the wake of a bull run. All withdrawal requests are being scanned to question the source of money and details of counterparties controlling the external wallets where the cryptos would be moved.

"There is no law under which exchanges can ban withdrawals," said a senior official of an exchange.

Compliance Frameworks
"Exchanges have to save their skin. If there is fraud or dubious fund transfers, the Enforcement Directorate would come after them and freeze their bank accounts. So exchanges are adding new layers that make withdrawals tougher. Stalling suspicious withdrawals is essentially to mitigate that risk," said the official.

The power to freely withdraw coins from investors' registered wallets with exchanges can be misused in different ways.

For instance, now with the market going up after a lacklustre 2023, someone can float a scheme to raise money by promising high returns to individual investors, buy cryptos with the fund and then withdraw the coins to a private wallet or move them to a wallet of an overseas exchange or to the personal wallet of a third party located in another country. Such withdrawals can also be a way to bypass banking channels to move money out of the country in the garb of cryptos. Most legal opinions veer around to the view that this could be a violation of the Foreign Exchange Management Act.

An investor who opens a trading account and wallet with an exchange goes through the customary know-your-customer process that involves submitting PAN, Aadhaar, address proof, etc. However, for withdrawal of coins - which is allowed selectively - a next level of due diligence kicks in. And, in the absence of any local law or regulation on withdrawal, exchanges are putting in place their respective compliance frameworks.

"The rules would differ from exchange to exchange. For any withdrawal request, exchanges would seek information like income statement, income tax return, details of account an investor plans to send the crypto to, the network that will be used for the transfer and the receiver's wallet address. Crypto withdrawals are available for select users only," said another exchange official.

Verification Process

If coins are sent to an already known and previously verified wallet, the process is comparatively simpler. But if the transfer is to an unknown wallet, additional steps are followed. Once all the details are shared, the withdrawal request is reviewed for verification.

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